Covad to buy BlueStar for $202 million

2 min read

Covad Communications (Nasdaq: COVD) said Friday it will buy privately held BlueStar Communications Inc., a provider of broadband in the southeastern U.S., for about $202 million.

Shares in the broadband services provider using DSL (Digital Subscriber Line) technology closed at 25 1/4 Thursday. The stock has fallen from its 52-week high of 66 5/8 , but rose recently on rumors it could be a buy-out target. BlueStar, which was planning to go public, will withdraw its registration.

The deal will expand Covad's national reach beyond major metropolitan areas into smaller, under-served cities and rural areas in the southeast, extending its services to about 40 percent of all U.S. homes and 44 percent of all U.S. businesses.

The company said by using BlueStar's direct sales model, it will increase total revenues by adding higher revenue lines -- BlueStar's lines have an average selling price about twice that of Covad's. But the new approach will lower Covad's 2000 line growth to roughly 330 percent and reduce 2001 line growth to roughly 150 percent.

Covad added that the tradeoff will generate higher company revenues and higher returns on installed lines for its shareholders.

The deal is an all stock transaction in which Covad will exchange eight million shares of Covad stock and assume all of BlueStar's existing debt. Up to five million additional Covad shares may be issued to the BlueStar stockholders if certain performance targets are met over the 2001 fiscal year.

Based on the eight million shares, the acquisition is valued at about $202 million as of Covad's Thursday closing price.

Covad's top competitors include NorthPoint (Nasdaq: NPNT), Rhythms NetConnections (Nasdaq: RTHM) and SBC Communications (NYSE: SBC).

The deal is expected to close within 60 to 120 days.